Odd (good) financial situation starting residency - how much house to buy?

[Zaphod]

awesomesauce wrote:

Zaphod wrote:

awesomesauce wrote:

Gas_Doc, I appreciate the comments, and will take them to heart. I suspect part of the issue is that we paid off a mortgage on a $300k house before we turned 30 (and while SO was in medical school), so my general expectations about how our financial and housing prospects will scale upwards in the future are…optimistic? This may be just an intellectual disconnect in my head, though – my high-paying job is what enabled our current situation, but it feels like this is just a hobby for me while I wait out SO becoming a “real doctor”.

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You will be disappointed. 300k with some serious taxes just doesnt go that far. Why would you just give up your good paying job in residency, you should still be knocking it out then.

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…what taxes? No capital gains tax on <500k (married) on primary residence.

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I meant on a 300k/y salary. Capital gains will only be above what you paid for it, ie the appreciation, everything else is really just return of capital minus a hefty transaction fee.

The other thing to remember that as you move away from the median/average home prices in your area you are taking an illiquid asset and making it much much worse by then limiting the amount of people who could even consider buying your property. Higher priced homes are sometimes on the market a long time, only a few can buy them naturally and you just wont be able to necessarily cash out asap if you wanted and they do carry high holding costs. Buyers being more wealthy can also be on average a bit smarter and more shrewd and will negotiate and dont have the pressures necessarily of needing to get into a place at a certain time. Im currently looking for just such a situation myself, an overextended owner who has to leave a nice place where I can offer a heart breakingly low sum in a slow market that they will initially be mad about but maybe have no other options. If they balk, big deal, I dont have to go anywhere and can wait.

One of my partners did this a couple years ago as well, his neighborhood apparently hated him for a bit for having a terrible comp in the area.

[awesomesauce]

Zaphod wrote:

awesomesauce wrote:

Gas_Doc, I appreciate the comments, and will take them to heart. I suspect part of the issue is that we paid off a mortgage on a $300k house before we turned 30 (and while SO was in medical school), so my general expectations about how our financial and housing prospects will scale upwards in the future are…optimistic? This may be just an intellectual disconnect in my head, though – my high-paying job is what enabled our current situation, but it feels like this is just a hobby for me while I wait out SO becoming a “real doctor”.

Click to expand…

You will be disappointed. 300k with some serious taxes just doesnt go that far. Why would you just give up your good paying job in residency, you should still be knocking it out then.

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...what taxes? No capital gains tax on <500k (married) on primary residence.

[Hatton]

This attitude that you deserve something that you really cannot afford is deadly.  It is akin to the morbidly obese patient that states I deserve this dessert because I have been good today.

[The White Coat Investor]

awesomesauce wrote:

I appreciate the feedback. Sounds like we should scale back our plans.

 

Nonetheless, it still feels “weird” to me that (assuming nothing goes massively wrong), SO will have a ~$300k/yr job in 5 years – a salary that easily (and reasonably) buys a $1M house – yet despite being able to make a ~50% downpayment, we would be ill-advised to buy a “stepping stone” house along the way to that “mansion”.

I know the more prudent folks here advocate for retirement savings and equity investments, but, well, we didn’t train for this long just to retire as soon as possible. And what else is there to do with that kind of money? Some people like boats, we like houses.

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I disagree that a $300K salary = $1M house. I generally recommend having a mortgage no larger than 2X your gross, so a $300K salary would mean something closer to $600K unless you have $400K to put down.

I also disagree that $300K is "~50%" of a $1M house (maybe you were referring to the $750K house?) I know how long and how much effort and sacrifice it took me to come up with my first $200K. It's a lot of money.

If you prefer to work longer, take fewer/cheaper vacations, drive crummier cars, skip the boat, and have a sweet house, you can do that. But the idea that you should spend a lot because you eventually expect to have a higher salary is the idea that keeps most docs from accumulating wealth. 5 years is a long time.

[Zaphod]

awesomesauce wrote:

Gas_Doc, I appreciate the comments, and will take them to heart. I suspect part of the issue is that we paid off a mortgage on a $300k house before we turned 30 (and while SO was in medical school), so my general expectations about how our financial and housing prospects will scale upwards in the future are…optimistic? This may be just an intellectual disconnect in my head, though – my high-paying job is what enabled our current situation, but it feels like this is just a hobby for me while I wait out SO becoming a “real doctor”.

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You will be disappointed. 300k with some serious taxes just doesnt go that far. Why would you just give up your good paying job in residency, you should still be knocking it out then.

[Zaphod]

awesomesauce wrote:

East coast wrote:

Curious as to how you made the math work to presume a bank would loan that amount for a house at that price point given an income of $50-$60k? I think Allonblack and EH hit the nail on the head.

 

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Well, assume a resident’s income of $50k/yr, and assuming we “supplement” our income over the next 5 years with the $300k we make selling our home, that gives us another $50k/yr (I realize a bank may not be OK with this). A 5/1 ARM on a $600k loan is <$3k/mo in payments. Seems very reasonable? And that assumes I don’t work and SO doesn’t moonlight.

 

I don’t mean to argue with anyone – I genuinely appreciate the wise advice, and realize that I’m suggesting something that is probably generally seen as financially imprudent. But let me ask: if a (hypothetical, different) resident went and got a “doctor loan” to buy a house, is he really using it to buy a $150k fixer-upper (because that’s all he qualifies for at a $50k/yr income)?

We’ve lived frugally as “grad students” for over a decade and have some net worth to show for it – I have a hard time believing that the next house we can buy is nearly the same house as can be bought by a resident with $300k in debt.

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This is just a terrible idea. Bank wont do it anyway thank goodness. Its not financially imprudent its akin to lighting money on fire and paying someone for the pleasure. Doesnt matter what you believe things should be, this attitude will get you in trouble very fast.

Yes, thats what a resident can get, and residents shouldnt be buying houses anyway, its a poor move with the risk:reward probabilities way skewed to risk, the only person making any money on the transaction for sure will be the real estate agent.

With your outlook on what is reasonable and admitted spending proclivities you will put yourself into a hole matching other docs who werent paying attention fast.

[awesomesauce]

Gas_Doc, I appreciate the comments, and will take them to heart. I suspect part of the issue is that we paid off a mortgage on a $300k house before we turned 30 (and while SO was in medical school), so my general expectations about how our financial and housing prospects will scale upwards in the future are...optimistic? This may be just an intellectual disconnect in my head, though - my high-paying job is what enabled our current situation, but it feels like this is just a hobby for me while I wait out SO becoming a "real doctor".

[Gas_Doc]

awesomesauce wrote:

I appreciate the feedback. Sounds like we should scale back our plans.

 

Nonetheless, it still feels “weird” to me that (assuming nothing goes massively wrong), SO will have a ~$300k/yr job in 5 years – a salary that easily (and reasonably) buys a $1M house – yet despite being able to make a ~50% downpayment, we would be ill-advised to buy a “stepping stone” house along the way to that “mansion”.

I know the more prudent folks here advocate for retirement savings and equity investments, but, well, we didn’t train for this long just to retire as soon as possible. And what else is there to do with that kind of money? Some people like boats, we like houses.

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I'm sorry, but there are so many things wrong with this mentality. I'm going to break down each thing because I just can't help myself:

"SO will have ~$300k/yr job in 5 yrs - a salary that easily (and reasonably) buys a $1M house"" 
- I can tell from this statement that your wife has not been in medical practice long (though I'm cheating because you said she's an MS4). The further long in training she gets, the more people she will meet that didn't travel along the professional plan they had initially devised. There are all sorts of things that could derail your 5-year financial plan: pregnancy, illness, family emergencies, failing boards, burnout, change of specialty, change of program, etc. You cannot rely on a hypothetical income 5 years from now. Also, because a banker (who's livelihood is based on closing as many mortgages as possible) says you can afford a house doesn't mean you should buy that much house.

 

"despite being able to make a ~50% downpayment, we would be ill-advised to buy a “stepping stone” house along the way to that mansion."
- It's not about the down payment, it's about your lack of household income when you move. Why do you feel the need to trade up to that "stepping stone" house? Even assuming everything works out perfectly for your wife professionally over the next five years (ie doesn't change specialties, no academic hiccups), do you really think you will be that much happier in the $750k house than you would in a $400k house? You have to keep in mind the strain on your everyday finances (mortgage payment trumps going out to eat) not to mention the over-leveraged place you put yourself into.

 

"I know the more prudent folks here advocate for retirement savings and equity investments, but, well, we didn’t train for this long just to retire as soon as possible."
- Your wife may (will?) feel differently in 15-20 years when the overnight calls start to take a toll and your kids take up more of her sparse free time.

 

"And what else is there to do with that kind of money?"
- You said it already: go out to nice restaurants! How does an impromptu trip to the The French Laundry sound the next time you are in the Bay Area for a medical conference? Or how about a 2-week trip to Australia and New Zealand for you and the kids? The financial freedom required to do things like this are a lot easier when you aren't house-poor.

[awesomesauce]

I appreciate the feedback. Sounds like we should scale back our plans.

 

Nonetheless, it still feels "weird" to me that (assuming nothing goes massively wrong), SO will have a ~$300k/yr job in 5 years - a salary that easily (and reasonably) buys a $1M house - yet despite being able to make a ~50% downpayment, we would be ill-advised to buy a "stepping stone" house along the way to that "mansion".

I know the more prudent folks here advocate for retirement savings and equity investments, but, well, we didn't train for this long just to retire as soon as possible. And what else is there to do with that kind of money? Some people like boats, we like houses.

[Gas_Doc]

Out of curiosity, what is the state of the real estate market in your future town? Are we talking San Francisco-type real estate where $750k gets you a 1 Bed/1Bath 600 sq ft condo, or is there a (unnecessary) need to "treat yo' self" with a 5000 sq ft mansion? Frankly, I agree with everyone else that it would be ill-advised to spend $750k on a house with a household income of $50k/year. Why buy as much home as possible when it's just the two of you?

[The White Coat Investor]

awesomesauce wrote:

Long time lurker of these forums, coming to ask for some advice/perspective as my significant other is starting MS4 and beginning to think about residency:

We have gotten lucky in that I worked in a high-paying job while SO was in medical school. We outright own a house, worth ~$300k, in a hot (seller-friendly) housing market. No debt at all (student or otherwise). About $50k in savings and another $50k in retirement accounts. Being 30, we’re probably a bit behind on retirement savings, but we are debt-averse and wanted to pay off the mortgage.

We’d like for me to stay home with (future, potential) children while SO is looking at a combined residency/fellowship program (SO is an MD/PhD) that will take 5 years. So assuming my income is zero, but we have this pile of at least $300k in cash on-hand (once we sell this house), and SO is making a resident’s salary, how much house could we reasonably afford to buy?

I know that buying a house in residency is generally “bad”, but we really hate renting, and will likely be in the same place for 5 years. Also, we tend to spend quite a lot on living expenses.

My calculations lead me to think that we could afford about $750k on a 5/1 ARM.

Any thoughts on that, or other sage advice about our financial situation as we begin this rocky ride?

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Sorry, that's insane. $750K on an income of $50K is crazy, even if you have $300K. What are you planning to do with the $300K? Put it down? Use it to gradually pay the mortgage? You guys are way ahead of the typical doc but it seems like you'll "catch up" to them quickly by consuming your advantage in higher living expenses.

If you guys really want to buy, how about a $250K house that you put $50K down on? Or a $400K house that you put $300K down on? Those seem like more reasonable options to me.

[Hatton]

Maybe you should get a job which will make it easier to qualify for a mortgage of any type.  Your wife is not yet pregnant.  It may not happen right away.  As WCI frequently says you can have it all but not right away.

[EH]

Right, but for a loan your income is 50K, not 100K. You can take out the same loan as another resident with a 50K income, although you have the advantage of being able to put down a larger downpayment to increase the size of the house. This doesn't get you anywhere near 750k though I don't think.

[awesomesauce]

East coast wrote:

Curious as to how you made the math work to presume a bank would loan that amount for a house at that price point given an income of $50-$60k? I think Allonblack and EH hit the nail on the head.

 

Click to expand...

Well, assume a resident's income of $50k/yr, and assuming we "supplement" our income over the next 5 years with the $300k we make selling our home, that gives us another $50k/yr (I realize a bank may not be OK with this). A 5/1 ARM on a $600k loan is <$3k/mo in payments. Seems very reasonable? And that assumes I don't work and SO doesn't moonlight.

 

I don't mean to argue with anyone - I genuinely appreciate the wise advice, and realize that I'm suggesting something that is probably generally seen as financially imprudent. But let me ask: if a (hypothetical, different) resident went and got a "doctor loan" to buy a house, is he really using it to buy a $150k fixer-upper (because that's all he qualifies for at a $50k/yr income)?

We've lived frugally as "grad students" for over a decade and have some net worth to show for it - I have a hard time believing that the next house we can buy is nearly the same house as can be bought by a resident with $300k in debt.

[East coast]

Curious as to how you made the math work to presume a bank would loan that amount for a house at that price point given an income of $50-$60k? I think Allonblack and EH hit the nail on the head.